CFA Level I · CFA Level I Exam · Forward Commitment and Contingent Claim Features and Instruments
An investor owns a share bought at 60 and writes a European call with exercise price 65 for a premium of 4 (a covered call). At expiration the share price is 72. The investor's total profit on the combined position, ignoring dividends and financing, is closest to:
The profit is 9. The shares are effectively sold at the exercise price of 65, a gain of 5 over the 60 cost, and the 4 premium is kept, giving 9. Ignoring the call obligation would wrongly give 16 (12 plus 4).
- A4
- B9Correct
- C16
Explanation
Share gain = 72 - 60 = 12. The short call loses 72 - 65 = 7 but the premium of 4 is received, giving -3. Total = 12 - 3 = 9. Equivalently, shares are called away at 65: gain 5 plus premium 4 = 9. The value 16 ignores the call's loss.
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